A second home can be a great vacation home for you and your family. It can also be a great way to invest in the real estate market and build wealth over time. But you’ll need to finance your Washington home somehow.
Find out how to get a mortgage for a second home so you can start enjoying your own vacation home or extra income in rent.
There are a couple of criteria that a property has to meet in order for it to be classified as a second home.
The first is that it can’t be used as an investment property to be rented out. Secondly, the home must be located a good distance away from your primary residence with a few exceptions. When an underwriter reviews the loan application, the use of the property as a vacation/second home has to make sense.
Buying a home close to your job to stay at during the week in order to avoid a two hour commute makes sense. Buying a home that’s half the value of your current residence and a mile away is a tough sell and will likely trigger the property being classified as an investment property.
Mortgage Lenders also look at how the home will be occupied and whether the property itself fits second-home guidelines. In general, the home should be suitable for personal use as a second residence, and the overall situation should support that classification. If the occupancy pattern or the type of property does not align with second-home use, the lender may treat it differently during underwriting.
If you’re looking for a vacation home in Washington state to spend your holidays in, buying a second home can afford you with a plethora of opportunities.
But like your primary residence, buying a second home in cities like Seattle, Kirkland, Bellevue, or Redmond and is an incredibly expensive endeavor and one that requires a substantial investment of capital.
Getting a second mortgage is usually a requirement in order to help you find this big purchase, but it can be a little bit trickier to secure another mortgage compared to getting your first.
A second mortgage and a mortgage on a second home are not always the same thing. A second mortgage usually refers to additional financing secured by a property you already own, while a mortgage on a second home refers to the loan used to purchase that separate property. Understanding the difference can help you compare financing options more clearly as you plan your purchase.
If you’re wondering how to get a second mortgage in cities across Washington state, we have some tips that may help.
Here are some tips to getting a mortgage to finance a second home in Washington.
If you’ve owned your primary home for a while, odds are you’ve built up a significant amount of equity in it over the years. Through regular mortgage payments (that are contributing to the principal portion of the mortgage) and appreciation in value (over time or through home improvements), your home equity has likely increased quite a bit.
One of the great things about equity – which is represented by the value of your home minus what you still owe on your mortgage – is that you can borrow against it like a loan. You can then use the funds borrowed against your equity to be used to fund other expenses, including a down payment for a second mortgage.
There are a few different ways to use your home’s equity, including taking out a cash-out refinance.
With this type of loan, you would refinance your mortgage to extract the cash needed.
To illustrate, let’s say your home is worth $250,000 and you still owe $100,000 on your mortgage. That means you would have $150,000 in equity (less any closing costs and expenses).
In this case, you may be able to refinance your existing mortgage for more what you still owe. If you want $50,000 in cash, you could refinance for $150,000 (the $100,000 outstanding balance, plus the $50,000 they want to take out in cash).
In order to extract that much, you would need to have:
For many buyers, using the equity they already own in their primary home is the most economical and feasible way to get a mortgage on a second home.
A HELOC – or a ‘home equity line of credit’ – is another way to tap into the equity in your primary residence. Again, you would need a certain amount of equity built up in your Seattle or Bellevue home in order to take advantage of this type of loan.
If there is enough equity built up in your property, all you would need to do is take out a line of credit and use the funds for a down payment on a second mortgage.
With this option, you wouldn’t have to refinance your primary home. Instead, your first mortgage would stay as is with another loan being taken out with completely different terms.
In some cases, you may be able to use the entire equity amount of your primary home with a HELOC, though it’s more likely that the limit would be closer to 85-90%. That said, the amount you’re allowed to borrow against your home will depend on your financial health, credit score, and what your lender’s rules are.
HELOCs are unique types of loans that work differently than your average loan. Considered a type of revolving credit, HELOCs work more like a credit card than a traditional installment loan.
Like a credit card, you would have access to a specific credit limit that you can borrow against. You’re free to withdraw as much or as little as you like without going over the credit limit, just like a credit card.
You’re only charged interest on the portion withdrawn rather than the whole amount, and once you repay whatever you’ve taken out, you’re free to continue borrowing against the credit limit again and again. The downside to a HELOC is the rates are not fixed and you cannot deduct the interest based on current tax laws.
While you could borrow against the equity in your first home in Kirkland or Redmond, you may be able to qualify for a conventional home loan on the second home itself.
If you are looking at a loan within the conforming loan limits in your area, you can expect to pay the same rates on a second home as you would on a primary residence. This is not the case on an investment/rental property. Conventional loans for a second house require a minimum 10% down payment, and jumbo loans require at least 20%.
In addition to the down payment, buyers should plan for closing costs and other upfront cash needs at purchase. Looking at the full amount required helps you prepare beyond just the loan itself and can make it easier to compare financing options. Having a clear estimate of total cash needed can also help you decide how much to use from savings, equity, or other available funds.
When qualifying for a mortgage on a second home, lenders may also look for cash reserves after closing. These reserves generally show that you have additional funds available beyond the money needed to complete the purchase. Having stronger reserves can support your application and demonstrate that you are prepared to manage the added housing expense.
To increase the odds of securing a mortgage for a second home, consider the following:
Pay down your debts – Your lender will look at your debt-to-income ratio, which represents the amount of your monthly income that is dedicated to paying down your debts. The lower your debt amount, the better.
If you have time, be diligent about paying down your debts to bring your debt-to-income ratio down and improve your odds of mortgage approval for your second home. Pay special attention to higher-interest debts that eat up more of your money.
Improve your credit score – It can be a little more difficult to get approved for a conventional mortgage for a second home, and having a good credit score helps. To get the best rates lenders usually like to see credit scores no less than 740, although with a larger down payment you can get away with a lower score before you see higher rates..
If your score is not quite within that range, take some time to give it a boost. You can improve your credit score by:
Buying a second home can afford you with a number of possibilities. Whether you choose to spend your holidays and weekends in your vacation home without having to go through the hassle of booking hotel rooms, or want to collect extra money in rent every month as an investment property, adding a second home to your portfolio has its perks.
To help make your dreams of buying a second home a reality, consider the above-mentioned ways to help you finance this big purchase and improve your chances of getting a second mortgage.
Sammamish Mortgage is a family-owned and operated Mortgage Company that has been proudly serving the Pacific Northwest since 1992. We lend in all of Washington State, Oregon, Idaho, California and Colorado and provide many mortgage programs with flexible qualification criteria. Get in touch with Sammamish Mortgage today!
A second home is typically a property used by the owner for personal occupancy rather than primarily as a rental. It should usually be located a reasonable distance from the primary residence, and its intended use must make sense to the lender.
A true second home is generally not classified as a property that is primarily rented out for income. If the home is mainly intended as a rental, a lender may treat it as an investment property instead.
It can be more difficult because lenders often apply stricter qualification standards for second homes. Borrowers usually need strong credit, stable income, manageable debt, and enough funds for the required down payment and reserves.
Home equity from a primary residence can be used to help fund a second home purchase. Common options include a cash-out refinance or a home equity line of credit, which can provide funds for a down payment or other costs.
A cash-out refinance replaces the existing mortgage on a primary home with a new, larger loan and provides the difference in cash. Those funds can then be used toward the purchase of a second home.
A HELOC is a home equity line of credit secured by the equity in a primary residence. It works like revolving credit, allowing the borrower to draw funds up to an approved limit and use them for expenses such as a second home down payment.
Yes, a buyer may be able to qualify for a conventional mortgage on the second home directly. Approval depends on factors such as credit score, debt-to-income ratio, income, down payment, and whether the property meets second-home guidelines.
Conventional second-home loans often require at least 10% down, while jumbo loans commonly require at least 20% down. The exact requirement depends on the loan type, lender guidelines, and borrower qualifications.
Higher credit scores generally improve approval odds and pricing for a second home mortgage. Many lenders prefer to see strong credit, and better terms are often available to borrowers with higher scores.
Approval odds may improve by paying down debt, lowering the debt-to-income ratio, maintaining consistent income, improving credit, avoiding new credit accounts before applying, and saving enough for the down payment and reserves.
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